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US Treasuries, Bank of Japan, ECB and more…

United States

Quantifying the position change following the quick and sharp selloff in US Treasuries following the Mario Draghi comments a few weeks ago, the near 10 yr high in spec net longs moderated a bit for the week ended Tuesday. See chart going back 10 years.

NET SPEC LONG POSITION 10 YR

US Treasuries will remain in this tug of war between getting bullied by the action in European bonds on one hand and the economic and inflationary behavior and reaction to Fed rate hikes on the other. What we’ve seen clearly over the past few weeks is that the former has dominated.

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For those keeping a close eye on US bank loan data, the rise in C&I loans for the week ended June 21st was basically given right back in the following week according to the data seen Friday. On a y/o/y basis, they are only growing by 1.8%.

Asia

The uneven nature of the Japanese recovery was reflected again in its volatile machine orders figure. They fell 3.6% m/o/m in May, well worse than the estimate of up 1.7% and follows a 3.1% drop in April. The decline was driven by falls in transportation, telecom and postal activities. A Japanese Cabinet official did not sound optimistic that things will get much better soon, “Machinery orders probably won’t be very strong in the coming months. We can’t say they will significantly worsen, but we don’t hear companies saying they will start recovering in July-September.” Granted this particular economic data point is very volatile month to month but I’m honestly confused by the weakness.

The BoJ had one day of success in its attempt to reestablish control over its yield curve out to 10 years. Worried on Thursday that the 10 yr yield got to 10 bps, their move on Friday drove it down to 8.5 bps. Today, it’s back to 9.4%. Also of note, the 5 yr JGB yield is the least negative since January 2016 at -.03%. It should be becoming more clear to all that something for now is changing in global sovereign bond markets. Kuroda did speak today and said the BoJ “will continue to adjust policy as needed.” Whatever that means but the yen is sitting at an 8 ½ week low.

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The Chinese inflation stats were about as expected in June. Consumer prices were up by 1.5% y/o/y for a 2nd straight month but the core rate did pick up one tenth to 2.2%, the quickest pace of gain since January. Also of note, food prices fell 1.2% y/o/y but that is the least negative since January. The CRB food stuff index closed down for a 3rd day on Friday but as I’ve highlighted it is still sitting near a one year high. Producer prices rose by 5.5% y/o/y. China went more than 4 yrs with falling producer prices which coincided with the bear market in industrial metal pricing. When those prices rebounded beginning last year, PPI reversed itself also helped by easy comparisons. Here is a chart of the CRB raw industrials going back three years and that are not far off from the highest level since 2014 but a classic head and shoulders does seem to be getting carved out on the right hand side. Or maybe it’s just a consolidation of the move:

CRB RAW INDUSTRIALS

China has attempted to shudder excess capacity in a variety of raw industrials but I hear too many stories that announced capacity cuts never end up actually happening. Chinese stocks both on the Shanghai comp and the H share names closed modestly lower overnight. We have seen a recent calm in bond yields and money market rates in China over the last few months.

Europe

In Europe, bond yields are getting a respite as they are down across the board. The next big thing is the ECB meeting next Thursday on July 20th where we believe Mario Draghi will set the stage for another taper announcement in September. In case you missed these comments late Friday, ECB Governing Council member Klaas Knot said that the ECB was “very close to the point that we run the risk of carrying on for too long with this policy…If we carry on with this policy for too long, that is absolutely a potential danger.” I credit Klaas for acknowledging this but I say to him that it’s too late, the bubble has already blown to epic proportions. Good luck getting out smoothly.

Data wise, German exports jumped 1.4% m/o/m in May, well better than the forecast of up .3% and to a record high. The export machine continues even as the euro strengthened a bit in May from $1.08 to $1.12. Exports to Asia are a growing piece of German business, particularly to China. I hope we now don’t hear more whining about the German trade surplus. While this data point is somewhat dated covering activity in May, the DAX is bouncing about .4% just weeks after closing at 2 month lows soon after the Draghi comments.